Preserve Assets While Providing Higher Transfer To Heirs And Charities
How many seniors do you know who have IRAs, annuities or cash assets that they are looking to leave to their heirs/charity? How many of them need a funding method to cover the cost of insurance on themselves?
For clients in the senior market, one of the most effective ways of leveraging assets is to move the monies into a single premium immediate annuity (SPIA) with a life-only option.
Then, take the payout that is provided (less the taxation on the payout, which is figured by using the exclusion ratio) and use the remaining amount to fund a higher death benefit life insurance policy with a lifetime death benefit guarantee, or a long-term care policy. If there are remaining funds, the client can take it as income, gift it to heirs or send it to a charity.
Why a life-only option on the SPIA? The structure avoids taxation to the heirs. It also avoids inclusion of the SPIA in the estate upon death of the client. When the client dies, the SPIA reverts back to the insurance company. But the clients beneficiary receives the life insurance policy proceeds in a larger face amount than the original deposit. (Note: The policys death benefit can be set up to be paid out to the heirs, to a charity or a percentage to both.)
To see the value in this, consider what happens if the client simply holds on to the original annuity, without moving it into a SPIA and also purchasing life insurance. Upon the clients death, the annuity proceeds would be subject to state and federal taxation, and in some cases the heirs would have to take a prolonged payout to get the monies paid out in full.
Here is an example: Let us say we have a 67-year-old man, rated standard non-smoker, who has $125,000 in an existing annuity. If he surrenders the annuity, he would have a penalty of $4,200. This leaves him with a total surrender amount of $120,800. His current company would give him a payout of $10,000. After federal and state taxes his net payout would be $6,500 each year.
By shopping the SPIA, however, a producer could use that same $120,800 and come up with a net payout of $7,800 each year after taxes. This $7,800 could purchase a lifetime death benefit guaranteed universal life policy with a death benefit of over $225,000.
Of course, our client can do several things with his $7,800 a year. He could use the cash as a retirement supplement, use all of the money to purchase a fully guaranteed life insurance policy or a LTC insurance policy, use part of the money to fund both life and LTC insurance, or do a combination of all three. But in any instance, you the financial advisor have provided for your client a higher standard of dollar leverage and tax savings than he previously had.